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Collecchio is a classic company town. Not far from Parma, in Italy’s Emilia Romagna region, its modest streets and squares sprout from a large dairy factory on its western outskirts. In 2003, on Christmas Eve, this unlikely village gained international fame when Parmalat, the factory’s multinational parent company, declared bankruptcy after its owner’s audacious accounting fraud came to light.

At its height, Parmalat operated in more than 30 countries, employed 36,000 people and reported annual revenue of nearly €8 billion. However, the company had lost money every year since listing in 1990, concealed by aggressive international expansion and heavily doctored accounts. From Parmalat’s nondescript head office on a quiet side street in Collecchio, founder and CEO Calisto Tanzi and CFO Fausto Tonna conspired to hide €14 billion of debt — eight times more than reported on the corporate balance sheet. The two executives, in addition to dozens of other former managers, auditors and bankers, are now the subjects of numerous criminal investigations.

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Like Enron, WorldCom and others, Parmalat triggered a host of hasty changes to corporate law, as the shocking scale of the fraud jolted regulators into action. (See “The Silver Lining” at the end of this article.) But there is an important difference between Parmalat and many of the scandal-ridden companies that imploded around the same time, explains Pier Luigi De Angelis, Parmalat’s CFO. “Enron died. WorldCom died. Parmalat is still alive.”

Indeed, not a single day of production was lost during the ordeal. Enrico Bondi, the company’s government-appointed administrator, used the powers granted by new bankruptcy laws to keep creditors at bay. Following divestments, closures and write-downs, in the summer of 2004 he transferred the group’s assets, such as they were, into one of the previous regime’s many dormant shell companies — Cimabue, named after a 13th century Florentine painter — and renamed it Parmalat. The new company with an old name returned to the Milan stock exchange in 2005, less than two years after it became Europe’s largest-ever bankruptcy. Though a shadow of its former self, Parmalat today is not only alive but thriving, in a sense.

Above the Law

While more than 12 billion glasses of Parmalat milk are consumed every year, the reborn company’s fortunes rely only partially on its dairy business. Bondi and Nicola Palmieri, Parmalat’s head of legal affairs, run a lucrative side-business suing the banks, auditors and other advisers that they allege were accessories to the fraud, turning a blind eye to the previous management’s schemes. After its bankruptcy, Parmalat retained 95 law firms in 32 jurisdictions, drawing on more than six million documents to launch hundreds of cases against former business partners around the world. “We keep the courts here in Italy quite busy,” Palmieri joked in an earnings call last month.

The company has collected €1.2 billion in legal proceeds to date, with banks settling to pay around 10% of the initial claims filed against them. Last year, Parmalat made €755m from these settlements, more than double the €367m in operating profits generated by its dairy business. With around 100 cases still pending, claiming notional damages of €50 billion, bank executives in Milan, Manhattan and other financial capitals continue to live in fear of the sleepy corner of Italian farm country where Bondi, Palmieri, De Angelis and other Parmalat executives unravel the old regime’s web of deceit.

But while investors cheer the firm’s legal victories — the proceeds largely flow to the bottom-line tax free — some are starting to doubt the current management’s ability to run its food business effectively. The euphoria following Parmalat’s triumphant relisting faded fast, and its shares have consistently underperformed others in the sector. (See “Milk Dud” at the end of this article.) On an enterprise value to Ebitda basis, Parmalat is trading at around a 10% discount to food and beverage benchmarks, and 20% more cheaply than competitors such as Nestlé, Danone and Unilever.

Court hearings due this year on Parmalat’s most important remaining cases — suits filed in American courts claiming $10 billion (€6.8 billion) of damages against Bank of America and Citigroup — should provide visibility on the company’s legal endgame. Then what? Many doubt that Bondi, one of Italy’s most respected turnaround specialists, would be satisfied with life at an ordinary, medium-sized food group. If he goes, the long-time associates he brought to the company, including CFO De Angelis, are likely to follow. Some even suggest that unless current management present a clearer vision for Parmalat’s core business soon, investors may field rival lists of directors when shareholders gather to vote on the board’s renewal next month.

“Today, Parmalat is a semi-finished product,” De Angelis admits. “We need to become a global company, as in the past, but this time balancing business and geographic risk.” Despite the success that Parmalat’s seasoned crisis managers have had fighting legal battles and unwinding a legacy of fraud, getting to grips with the milk business may prove just as much of a challenge.

The Milkman Calls

Before joining Parmalat in April 2006, De Angelis only knew about the company from its products and sponsorship of football teams and Formula 1 drivers. He had little knowledge of the food industry, having moved from Florence to Turin in late 2005 to become CFO of Lavazza, a coffee company, after a long career in finance at various Italian industrial groups.

He received a call from Bondi at Parmalat only a few months after joining Lavazza. “It was a Thursday,” De Angelis recalls. Jumping at the chance to be involved in such a high-profile turnaround story, “I was in Collecchio on the following Monday,” he says.

De Angelis had first worked with Bondi in the 1980s at Fiat, and later followed him to Edison (Montedison at the time). At Parmalat, he replaced Guido Angiolini, another long-time ally of the CEO. Having joined the stricken dairy company at the same time as Bondi, Angiolini reportedly had to be convinced to stay on as CFO beyond the firm’s initial crisis stages.

Naples-born De Angelis describes Parmalat’s bankruptcy as “sad for Italy.” It is maybe for this reason that the company isn’t having trouble recruiting new employees to help restore its reputation, the CFO says. Not that Parmalat has been in hiring mode lately. In 2003, it generated revenues of €4 billion with more than 32,000 employees. Last year, it recorded nearly identical sales with a payroll of around 14,500.

The finance function De Angelis inherited is unrecognisable from the one run by Tonna, the hot-headed former CFO known for smashing holes in desks, shattering glass doors and, famously, wishing reporters “a slow and painful death” on his way into the Parma prosecutors’ office. “For sure, the first, second and third levels were all replaced,” says De Angelis. Financial advisers with ties to the old regime were also cut loose. But De Angelis finds no fault with the remaining clerical and accounting staff who had worked under Tonna.

Parmalat’s legal campaign against nearly every major financial group also complicates the CFO’s relationship with its banks. “I am aware that we are conflicted with some parties,” he says. The rapport that develops between a finance chief and his bankers — which comes in handy when credit conditions are as difficult as they are now — is off the cards at Parmalat. Though he knows all of the major players from relationships built during previous jobs, his dealings with them now are cool at best. “Business is business,” he says. “They don’t put me in difficult situations, and I don’t put them in difficult situations.”

He bats away most questions about Tonna’s legacy in the finance department of Parmalat. “I don’t like to speak about the past. I wasn’t involved,” he says. “We changed the people. We changed the organisation. We changed the systems. We are looking to the future.”

Soul Asylum

As De Angelis sees it, the future is complicated by the fact that the company has three anime, or souls. Tellingly, he hesitates for a moment before deciding in what order to describe them.

First, there is the core business. As a self-described “technician,” most of De Angelis’s contribution to the corporate income statement comes below the operating line. His proudest achievement — the thing he mentions first on conference calls and during meetings with investors — is simplifying the company’s control chain.

This is no small feat, explains Bruno Cova, a partner at law firm Paul Hastings in Milan. He served as Parmalat’s chief legal adviser from January 2004 to April 2005. With little centralised information on how Parmalat was organised, he pieced the puzzle together by fielding calls from far-flung subsidiaries getting in touch with the head office as news about the bankruptcy spread. “The structure was opaque by design,” Cova says. “That was one of the old management’s objectives.” Bonlat Financing, the Cayman Islands-based company whose forged bank-account statements brought about Parmalat’s downfall, could be traced back to the parent company via a chain of a dozen firms that passed through Malta, the Isle of Man, Luxembourg and the Dutch Antilles. (See “Web of Deceit” at the end of this article.)

When De Angelis arrived at Parmalat, he faced a “constellation” of 225 companies, only 50 of which were operational. He considers it a “miracle” that today the group includes less than 70 companies, 40 of which are operational. Later this year, €40m in dividends will flow to the parent company that would have otherwise been lost in its Byzantine organisation. Marco Baccaglio, an analyst at Cheuvreux in Milan, reckons that Parmalat can save between €15m and €20m of costs, or around €250,000 per legal entity, by rationalising its control chain.

This is not to say that De Angelis is relegated to the back office. He makes the short drive from his office to the Collecchio factory once or twice a week. As he strides across the bridges that snake above the factory floor, pots of yoghurt shuffle along conveyor belts and the smell of strawberries lingers in the air. This business is much easier to understand than some of the others he’s worked in, such as chemical fibres or copper processing, he says.

Over the din of the assembly line outside a conference room, Leonardo Bonanomi, head of Parmalat’s Italian operations, explains the group’s new product strategy under De Angelis’s approving gaze. Last summer, Parmalat launched a range of fruit juices under the Santàl brand. With operating margins more than double those earned on milk, and a market that is growing twice as fast, this guards against the growing commoditisation of the firm’s core product. Offered in five colour-coded flavours — “the colours of health” — the benefits touted on the package represent the company’s other product priority, value-added “functional” products.

“If you have high cholesterol, you don’t care if a yoghurt that’s good for you costs €1.00 or €1.05,” notes De Angelis. A host of health-oriented trademarks — “Cardi Top,” “Rego Plus” — now feature prominently on many of Parmalat’s products. The company is also, for the first time, marketing certain milk, cheeses and yoghurt under single brands — such as Jeunesse (low fat), Zymil (low lactose) and Fibresse (high fibre) — saving on advertising costs, Bonanomi adds, nodding to De Angelis.

Cream of the Crop

The product strategy is connected to the company’s second soul, its evolving M&A strategy. In this area, the CFO plays a leading role, with support from Bondi and COO Carlo Prevedini.

To date, most of the work has been on divestments, unravelling the empire built on dodgy debt by Tanzi and Tonna. The fire sales slowed last year, however, and De Angelis adjusted the company portfolio along more strategic geographic and sector lines. He earned the company €248m in 2007 by offloading its low-margin Spanish operations and Boschi Luigi & Figli, a tomato business.

Today, 80% of both revenues and operating profits are generated in Italy, Canada and Australia, while milk accounts for 60% of sales and 50% of operating profits. With this in mind, De Angelis’s acquisition screen — “from countries to products to companies” — has identified opportunities in several “countries with double-digit growth.” Parmalat was in advanced talks with a Kenyan company, De Angelis notes, but pulled out recently when the country descended into civil war. He also describes India as a “very important market.” Wherever Parmalat goes, the CFO is quick to add, the company will maintain a group operating margin of between 10% and 11%.

Much of the cash that De Angelis can spend on takeovers comes from the legal settlements that constitute Parmalat’s third soul. To a certain extent, Tanzi, Tonna and their associates are now helping Parmalat, as the accusations they make during investigations bolster the company’s cases against the banks. In past hearings, Tanzi has claimed that bankers forced him into a “drug-like dependency” on loans, constructing “financial alchemies” that neither he nor Tonna fully understood.

In December, Parmalat settled cases against Intesa Sanpaolo for around €400m, its largest single settlement to date. “Our business strategy is obviously boosted by the availability of this money,” De Angelis notes. That said, “when we do the planning, we don’t consider litigation,” he adds. “We only consider investments when we have the money in our pockets. For us, there is only upside.”

The company swung from net debt of €170m at the end of 2006 to net cash worth €857m at the end of last year. “What can I say? Absolutely, we have no shortage of capital,” De Angelis says. He reckons the company’s ideal capital structure would feature roughly equal parts debt and equity, leaving scope to grow its war chest to billions of euros.

Whey Ahead

Analysts tend to value Parmalat’s core business at between €2.20 and €2.40 per share, while the value of future legal settlements would add between €0.50 and €2.00 to the share price. In the first weeks of February, the company’s shares traded around €2.40, a significant discount to most analysts’ price targets. The highly volatile, subjective nature of legal settlements explains this in part, but more fundamentally there are growing doubts that Parmalat’s managers are fully focused on, or capable of, maximising the value of its core business.

De Angelis rejects the suggestion that Parmalat’s managers are distracted by legal matters, noting that “people in operations only hear about it from the newspaper.” A mid-year profit warning, with full-year results only barely meeting the revised guidance, is trickier to explain away.

Last year, the price of Parmalat’s key inputs soared, as did many other commodities. Overall, the company’s raw material costs rose by around 10%, though for inputs in some markets the increase was 100%. Luca Bacoccoli, an analyst at Banca Caboto in Milan, questions executives’ readiness to respond to the price rises, calling their reaction “a little bit disappointing.”

For his part, De Angelis explains the perceived delay in defending margins as being at the mercy of the increasingly powerful retail chains that control distribution. Price negotiations take time, he says, and besides, with €215m of last year’s rise in revenue coming from price and product mix, in addition to €22m in volume gains, the company more than recouped the €150m rise in raw milk costs. Nonetheless, doubts continue to dog Parmalat’s executives.

“Often, the staff a company needs to manage a restructuring doesn’t have the same skills needed to grow the company once it’s up and running,” notes Adriano Bianchi, a Milan-based managing director at turnaround consultancy Alvarez & Marsal. “On the brink of bankruptcy, you need to get a handle on cash flow, minimise working capital and optimise the use of short-term credit lines. This exercise doesn’t necessarily require industry experts.”

This explains the potential for conflict at next month’s vote on Parmalat’s board renewal. The company’s bylaws require an annual payout to shareholders of at least 50% of net profit, estimated at around €550m in 2007. Even though this gives Parmalat’s shares a massive dividend yield of around 7%, analysts peppered executives with questions about a potentially bigger payout following the preliminary results announcement last month. If executives and directors want to stay, wouldn’t an outsize dividend help?

As of mid-February, the company’s largest shareholder — JPMorgan — held only 3% of Parmalat’s stock. However, any investor with more than 1% of shares can submit a list of directors. “If they want to replace us, they can,” De Angelis shrugs. Some of the largest shareholders are the banks whose debts were swapped for equity following the bankruptcy, some of whom the company is still suing. “It seems to me that they are a bit conflicted,” De Angelis adds.

As one of several “Bondi men” at Parmalat, few expect De Angelis to stay if his boss goes. What’s more, “my friends say that I’m not happy if I can’t manage a crisis,” he notes. Still, though he’s served as a finance chief of listed companies for some 20 years, De Angelis admits he has learned a lot from his experience at Parmalat. “I learned to be humble,” he says. “Parmalat is a real public company.” Indeed, early court hearings on the scandal were held in a Parma convention centre, such was the breadth of creditors, shareholders and other interested parties.

And though he accepted Bondi’s offer to turn around another stricken Italian company, his previous stint at a private, family-owned coffee company suggests a potential change in priorities for the 58-year-old. As he drives his estate car through the Emilia-Romagna countryside, as he likes to do with his Maremma sheepdog at his side, his thoughts must turn to what more he can do at Parmalat to make the people of Collecchio, and Italy, proud again.

Indeed, all listed companies in Italy now operate under insolvency and capital-markets regimes shaped by Parmalat’s 2003 collapse. The Marzano law, covering bankruptcy, is often compared to the US’s Chapter 11, while another — Law 262 — introduced a number of corporate governance requirements and bolstered the powers of Consob, the Italian stockmarket regulator.

In all, the changes created “a more modern, investor-friendly environment,” says Bruno Cova, a partner at law firm Paul Hastings in Milan and Parmalat’s chief legal adviser in 2004 and 2005. “We are seeing restructurings that would have been difficult to achieve in the past.”

As laws have changed, so have attitudes. Parmalat’s board of directors, for example, boasts nine independent members out of 11. This, and other similar practices, earned the company an accolade from Assogestioni, the Italian association of asset managers, for the most advanced corporate governance in Italy. Parmalat is “rightly proud” of this, notes Cova. “It is an example for others.”

Under founder and former CEO Calisto Tanzi, now indicted, Parmalat’s board once included Tanzi’s brother Giovanni, son Stefano and niece Paola Visconti. CFO Fausto Tonna chaired the audit committee. That anything at Parmalat could now be considered best practice shows how quickly things have changed.